Financial Literacy’s Effects on Consumerism Money controls the lives of all citizens in modern society and it directly impacts everyone’s lifestyles. Financial literacy has a significant impact on whether an individual spends money wisely, thus, affecting one’s livelihood. Financial illiteracy is defined by the President’s Advisory Council on Financial Illiteracy as ‘the ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well-being’. Through reformation of the education system and free, public programs to teach the public about finances, gaps in economic knowledge can be reduced. Doing this will improve the living conditions of the population, and greatly benefit consumers everywhere. Financial illiteracy reaps detriment across wealth classes. It creates an exploitive relationship between consumers and companies where companies use marketing techniques to prey on the little understanding of the average consumer.
The 2015 National Financial Capability Study states that 37% of participants passed a five-question literacy test with a four or five out of five. These questions included topics like such as compound interest and inflation.This study relays the appallingly low percentage of Americans who can answer basic questions on financials. Financial literacy and proper saving behavior go hand in hand. How do Social Factors Affect Financial Literacy? Richard G. Ketchum, chairman and chief executive officer of the George Washington University Business School, comments on the study that he participated in by stating that certain groups (particularly Hispanics, African Americans, and those without a high school education) struggle the most financially. He stated that “About half of respondents with only a high school diploma or no diploma could not come up with $2,000 in an emergency compared to 18 percent for those with a college degree.” Shockingly, this is a reality for this demographic due to the lack of access to high-paying jobs and financial education. The study further exemplifies the absence of financial education for these groups by pointing out that “only 31% of the respondents said they were offered financial education at some point in their lives.”What Are the Economic Effects of Low Financial Literacy? Crucial monetary prospects are impacted detrimentally due to the lack of financial literacy.
A survey illustrates that 69% of all Americans have less than $1,000 in their savings account.This number has risen by 7% since 2015.The most considerable factor behind these numbers is that people don’t understand how to live within their means. Michael Hardy, a financial planner from Molly & Harlott financial firm, expands on this by pointing out that ‘It doesn’t matter if they are making $30,000 per year or $300,000 – people don’t seem to know how to spend less than they make.’ Annamaria Lusardi, academic director at the Global Financial Literacy Excellence Center, commented that 40% of income inequality in the US is due to spending personal finances incorrectly. If people understood the future implications of poor saving habits, they’d be warier of the way they spend. The National Foundation for Credit Counseling (NFCC) also points out that “27% do not save any portion of their household’s annual income for retirement’ in 2017. Retirement is a critical aspect of one’s economic portfolio. This lack of saving can contribute to many future elderlies being dependent on the government to support them. These statistics prove that many Americans struggle financially and that the hole they are in is only getting deeper. 21% of participants in a survey by Brookings Institution – 38% of them with an income of under $25,000 – stated that winning the lottery was the best way to earn money for retirement.
The fact that these people believe that a chance so slim, such as the lottery, is the most optimal way to earn money (beating out getting a degree and working in a profitable field) demonstrates how easy it is for them to be exploited. Instead of spending money won from this ludicrous gamble effectively, winner oftentimes destroy their lives within a decade. A typical story associated with winning the lottery is that of Lisa Arcand. The Penny Hoarder details that she won $1 million and spent it all on a house and vacations. She opened a restaurant as an additional form of income. After she fell bankrupt within three years, she described the experience as ‘depressing.’ Businesses target those who are financially illiterate. The Harvard School of Public Health quotes Connolly, the director of the Tobacco Control Research Group at HSPH, as he states that ‘tobacco ads are ubiquitous in lower-income neighborhoods, particularly those with higher Hispanic and African American populations.’ These groups have less money and are disproportionately under-educated on finances.
Companies take advantage of their lack of knowledge to reap profit off of a dangerously addictive habit, like smoking. Financial Education and Its Impacts The curriculums of schools in America directly impact the financial decisions students make in the future. J. Michael Collins, a Ph.D. from the Center of Financial Security, outlines that the variance in state education makes a major difference in how students behave financially. He avows that ‘states that combine personal finance and economics, support teachers, and hold students accountable for learning objectives have the best chance of promoting the development of young people who are better financial managers.’The Council for Economic Education (CEE) compares the credit scores between states that implemented financial education mandates in 2007 to 2016. In Georgia, the average credit score rose from 612 to 629. This trend is consistent with all other states included in the chart. Therefore, there is a positive correlation between financial education and pecuniary behaviors.
Invariably, promotion of financial education is quintessential to the reformation of the education system. The CEE noted that in 2016, 20 states required high school students to take a course on economics, but this number decreased by two since 2014.This statistic makes it appear that the United States may be moving in reverse. Unfortunately, this is due to the way that the government is run. Education operates at a state and local level, and without adequate funding, support, and demand, programs like required personal finances become irrelevant to politicians. In Rhode Island, on the other hand, the Treasurer acknowledged the critical role that high school students played in implementing a state-wide personal finance program in an article by the Rhode Island State. Thus, it is possible to rally together and bring a resolution to raise financial literacy rates. Financial literacy is a critical weapon in the battle of consumerism in the global market. It gives edge over companies, banks, and facades that target the uneducated. Financial literacy varies amongst different demographic and income groups due to opportunities provided for these groups. To rectify the illiteracy epidemic, educational programs must be put into place. Some states, such as Idaho and Texas, have already incorporated such programs, and with great success. The United States struggles to follow suit, and if it becomes incapable of doing so, its people will be taken advantage of, thus damaging the economy. No longer can we be complacent in waiting for change in the government. It is time to accept the call to action and band together to exclaim from the rooftops for educational reform because as they say – “money makes the world go around”
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